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Resolving Insolvency - Azerbaijan

Resolving Insolvency - Azerbaijan. Why does it matter? What does it measure – and what does it not? Methodology changes in the past 5 years What are the main findings in DB19? Good practices Main findings for Azerbaijan. Why does Resolving Insolvency matter?. A good insolvency regime:.

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Resolving Insolvency - Azerbaijan

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  1. Resolving Insolvency - Azerbaijan

  2. Why does it matter? What does it measure – and what does it not? Methodology changes in the past 5 years What are the main findings in DB19? Good practices Main findings for Azerbaijan

  3. Why does Resolving Insolvency matter? A good insolvency regime:

  4. Why does it matter? What does it measure – and what does it not? Methodology changes in the past 5 years What are the main findings in DB19? Good practices Main findings for Azerbaijan

  5. What does Resolving Insolvency measure? Recovery rate Strength of insolvency framework index • Recovery rate is recorded as cents on the dollar recovered by secured creditors through reorganization, liquidation or debt enforcement (foreclosure or receivership) proceedings. • The calculation is based on the time, cost and outcome of insolvency proceedings involving domestic entities under a specific case study. • Measures the quality of insolvency laws applicable to liquidation and reorganization proceedings. • Based on 4 components: • Commencement of proceedings index • Management of debtor’s assets index • Reorganization proceedings index • Creditor participation index

  6. What does Resolving Insolvency not measure?

  7. Recovery rate:How is it calculated? The recovery rate is a function of the time, cost and outcome of an insolvency proceeding as well as the lending rate.

  8. What are the case study assumptions? Recovery rate Case study focuses on a limited liability company that: • Operates in the economy’s largest business city. • Has a downtown real estate, where it runs a hotel, valued at 100 times the income per capita or $200,000, whichever is greater. • Has 201 employees and 50 suppliers, each of which is owed money for the last delivery. • Has a 10-year loan agreement with a domestic bank secured by the hotel property and/or enterprise security interest. • Is 100% domestically owned with the founder (also the chairman of the supervisory board) owning 51%.

  9. What are the case study assumptions? Recovery rate The business is experiencing financial difficulties: • It had negativenetworth in 2018 and is expected to incur losses in 2019 and 2020. • As of January 1, 2019, there is no cash to pay the bank interest or principal, which are due on January 2, 2019. Cash flow in 2019 is expected to cover all operating expenses, except payments to the bank. • The amount outstanding under the loan agreement is exactly equal to the market value of the hotel and represents 74% of the hotel’s total outstanding debt, the remaining 26% is held by unsecured creditors. If the hotel is sold as going concern, it will fetch 100%of its current market value; if it is sold piecemeal, it will fetch 70%.

  10. Why does it matter? What does it measure – and what does it not? Methodology changes in the past 5 years What are the main findings in DB19? Good practices Main findings for Azerbaijan

  11. Methodology change in Doing Business 2015: Combining quality and efficiency • The Resolving Insolvency indicator initially focused on capturing the efficiency of insolvency proceedings through the recovery rate indicator set (time, cost, outcome of insolvency proceedings and how much creditors would recover at the end). • The indicator was expanded in Doing Business 2015 to also include the strength of the insolvency framework index, which measures the quality of the legal framework applicable to insolvency proceedings. Provide clear guidelines for insolvency reforms • Ensure that practice is better captured Develop a more accurate ranking of economies 1. What procedures are available to a DEBTOR when commencing insolvency proceedings? • Promotecollective insolvency proceedings • Acknowledge efficiency of individual recovery proceedings • Evaluate both the qualityof the legal framework and the efficiencyof proceedings • Based on good insolvency practices as identified by the World Bank principles and UNCITRAL legislative guide

  12. Strength of insolvency framework index The strength of insolvency framework index measures whether each economy has adopted internationally recognized good practices in 4 areas:

  13. Strength of insolvency framework index The strength of insolvency framework index measures the quality of the insolvency law. It is a legal index with a score that goes from 0 to 16. The index measures whether the legal framework applicable to judicial liquidation and reorganization procedures contains certain good international practices as defined by the World Bank’s Principles for Effective Insolvency and Creditor/Debtor Regimes and UNCITRAL’s Legislative Guide on Insolvency Law.

  14. Commencement of proceedings index • Commencement of proceedings index: 3 points max. • The index looks at the possibility for both the debtor and the creditors to initiate judicial reorganization or judicial liquidation, together with a concrete mechanism for commencement that will define the debtor’s insolvency. • In other words, it measures what insolvency proceedings are available to the debtor or the creditor and on what basis.

  15. Management of debtor’s assets index • Management of debtor’s assets index: 6 points max. • The index inquires into what happens with the contracts, transactions and finance of the debtor company during insolvency proceedings. • Implementing efficient and transparent regulatory mechanisms for the management of the debtor’s assets during insolvency proceedings may improve the likelihood of high recovery.

  16. Reorganization proceedings index • Reorganization proceedings index: 3 points max. • The index looks at the provisions governing the judicial reorganization. • Reorganization proceedings are those that are formally regulated, based on a concrete plan and aimed at restructuring the debts so that the debtor can re-emerge as a going concern.

  17. Creditor participation index • Creditor participation index: 4 points max. • The index tests if the law provides for specific safeguards protecting creditors during insolvency proceedings. • These safeguards include the right to appoint the insolvency manager, the duty toapprovethe sale of substantial assets, the right torequest information and the right to object to the decisions of the manager on acceptance of claims.

  18. Why does it matter? What does it measure – and what does it not? Methodology changes in the past 5 years What are the main findings in DB19? Good practices Main findings for Azerbaijan

  19. Where was it easy to resolve insolvency in 2017/18? Top ten performers Score • 1. Japan 93.45 • 2. Finland 92.81 • 3. United States 90.91 • 4. Germany 90.12 • 5. Norway 85.44 • 6. Denmark 85.13 • 7. Netherlands 84.28 • 8. Belgium 83.88 • 9. Slovenia 83.66 • 10. Puerto Rico (U.S.) 83.32

  20. 14 economies made resolving insolvency easier in 2017/18

  21. Why does it matter? What does it measure – and what does it not? Methodology changes in the past 5 years What are the main findings in DB19? Good practices Main findings for Azerbaijan

  22. Resolving InsolvencyGood practices Global good practices • Establishing or promoting reorganization and liquidation procedures • Eliminating formalities and introducing/tightening time limits • Strengthening creditor participation • Clarifying rules for commencing insolvency proceedings • Improving provisions applicable to treatment of contracts and voidable transactions • Introducing provisions on post-commencement financing • Regulating the profession of insolvency administrators

  23. Why does it matter? What does it measure – and what does it not? Methodology changes in the past 5 years What are the main findings in DB19? Good practices Main findings for Azerbaijan

  24. Azerbaijan and comparator economies – DB Ranking and Score • Source: Doing Businessdatabase.

  25. At the end of insolvency proceedings, secured creditors in Azerbaijan can recover 15.8 cents for every dollar loaned.

  26. On the strength of insolvency framework index Azerbaijan receives 13.5 out of 16 points.

  27. Reform efforts in 2017/2018 • Major positive reformin 2017/18 introduced by he Law on Amendments to the Law of the Azerbaijan Republic on Bankruptcy and Insolvency, effective from April 28, 2018. • Impact: A) Allowed the insolvency representative to apply to the court to invalidate the preferential transactions concluded during the six months period preceding the initiation of the debtor’s bankruptcy proceedings (+1 point on the management of debtor’s assets index). • Impact: B) Provided that secured creditors as a group take part in the voting on the rehabilitation plan (-0.5 points on the reorganization proceedings index).

  28. THANK YOU!

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